The French Open, Wimbledon and US Open champion was leading 6-0, 5-0 when Brazilian journeyman Daniel, 32, threw in the towel after being troubled by a left knee problem.
Nadal will play either Daniel Gimeno-Traver or qualifier Ryan Sweeting next as he targets the "Rafa Slam" -- the first time one man has held all four major titles since Rod Laver in 1969.
The Spaniard, who retired hurt from his quarter-final against Andy Murray here last year with a knee injury, said the disconsolate Daniel would be feeling "terrible".
"It's a terrible feeling to pull out of a match with an injury and I wish him all the best and a fast recovery," said Nadal. "If you are feeling bad you should not go on and it's best for the recovery."
The Spaniard's arch-rival Roger Federer enjoyed a convincing start to his title defence on Monday and 2008 champion Novak Djokovic was also in menacing form in his opening match.
On Tuesday, second seed Vera Zvonareva put down a marker in the wide-open women's draw with a straightforward 6-2, 6-1 win over Sybille Bammer.
Zvonareva is seeking her third consecutive Grand Slam final and her first major win. Last year's winner and five-time champion Serena Williams is out after cutting her foot on glass in a restaurant.
"I think we both struggled with the rhythm out there but the most important thing is I got through this match and I'm looking forward to the next one," Zvonareva said.
Women's favourite Kim Clijsters takes to the court against Russian former number one Dinara Safina later, while Australia's two-time major winner Lleyton Hewitt faces long-time foe David Nalbandian.
Their bitter rivalry, which stretches back to junior days, includes a bad-tempered quarter-final here in 2005 and the 2002 Wimbledon final, which Hewitt won in straight sets.
Clijsters is looking to add the Australian Open to her US Open title as she continues to dominate women's tennis despite a lengthy break to give birth to her daughter, Jada.
World number five Murray plays Karol Beck later as he searches for Britain's first Grand Slam title since 1936, after being well beaten by Federer in last year's final and the 2008 US Open decider.